Delaware Bankruptcy Court Curtails Lender’s Credit Bidding

Fisker Automotive Holdings, Inc. (“Fisker”), a designer and manufacturer of hybrid electric vehicles, has become a household name for bankruptcy attorneys across the country. Debt-laden as a result of senior loans facilitated by the United States Department of Energy (the “DOE”) and plagued by a key-component recall and an unexpected destruction of inventory during Hurricane Sandy, Fisker began exploring strategic alternatives in early 2012 in an attempt to sustain operations. No transactions materialized and in mid-2013 the DOE commenced a marketing and auction process for its interests. On October 11, 2013, Hybrid Tech Holdings, LLC (“Hybrid”) purchased the DOE’s position of outstanding principal of $168.5 million for $25 million. Shortly thereafter, Fisker commenced chapter 11 proceedings in the United States Bankruptcy Court for the District of Delaware to accomplish a private sale of its assets to Hybrid in exchange for a $75 million credit bid. The cases were assigned to Chief Judge Kevin Gross.

On December 5, 2013, the Office of the United States Trustee appointed an official committee of unsecured creditors (the “Committee”). The Committee immediately took action by opposing Fisker’s efforts to close an extremely fast-paced sale of its assets to Hybrid by challenging Hybrid’s right to credit bid the face value of the interest it purchased from the DOE. The Committee argued that Hybrid’s ability to credit bid the entirety of the $168.5 million loan would entirely stifle competitive bidding, resulting in a meaningless, if any, recovery to unsecured creditors. As an alternative to the quick sale process, the Committee proposed a $25 million cap on Hybrid’s credit bidding rights—the purchase price of the debt—and an open auction process with Wanxiang America Corporation (“Wanxiang”), an affiliate of the Chinese auto parts conglomerate and the same company that purchased certain assets of A123 Systems, the manufacturer of the lithium ion battery used in Fisker’s vehicles.

Following a hearing on the parties’ respective positions, the Court was called to determine whether Hybrid was entitled to credit bid the face value of its claim and, if so, whether the Court may cap Hybrid’s credit bidding rights. Absent a cap on Hybrid’s rights, there would be no auction, as it was clear the value of Fisker’s assets was far less than the face value of Hybrid’s debt. In connection with the hearing, the parties stipulated that certain assets offered for sale were not subject to properly perfected liens in favor of Hybrid or that such liens were subject to a bona fide dispute, thereby creating doubt on the validity and extent of Hybrid’s secured position.

Chief Judge Gross began his analysis by acknowledging that it is “beyond peradventure that a secured creditor is entitled to credit bid its allowed claim” under section 363(k) of the Bankruptcy Code. However, relying on the Third Circuit’s 2010 ruling in In re Philadelphia Newspapers, LLC, Chief Judge Gross found that the Code permits a Court to deny a lender’s right to credit bid for cause not limited to situations where the secured creditor engaged in inequitable conduct. Using this rationale, Chief Judge Gross capped Hybrid’s credit bidding rights at $25 million dollars because, absent such a ruling, bidding would “not only be chilled . . . but frozen.” The Court further held that Hybrid’s adherence to a rushed sale process was inconsistent with the Bankruptcy Code’s policy of fairness. Hybrid has appealed the decision.